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About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Thursday, December 03, 2009

Economy -- I'm Out On The End Of The Positive Limb

The US has experienced near depression conditions and severe
demand privation over the past two years. There is more economic
or capital slack in the system than at any time since the 1930's.

My reading of US economic history suggests to me that with
powerful monetary and fiscal tailwinds, the US should experience
a strong and sustained economic recovery that can run out at
least 5 - 6 years. Now, naturally it is not like days of yore when
US growth potential was quite a bit higher. I peg that potential at
2.8% growth per annum, but I do expect at least a couple of years
ahead where production grows at 5 - 6% and where employment
gains are strong. I also expect to see the US move from modest
deflation to inflation that could approach 5% on the CPI. Further,
I expect an eventual sharp climb in short term interest rates, with
the 91 day T-bill yield eventually returning toward 5%, and with
that could come a rise in longer dated Treasury bond yields back
toward 6%. That kind of inflation / interest rate framework will
crimp the stock market p/e ratio, but the offset there will be
likely substantially higher earnings.

I expect a return to more stable monetary policy, and I expect a
combination of higher tax revenues and a more aggressive trade-off
posture toward spending priorities will lead to substantial
improvement in fiscal budget balance. If anything, the risk now
is toward premature tightening and creation of fiscal drag. The
struggle in the years ahead to regain better fiscal and monetary
policy balance will increase economic volatility for short intervals.

I think we will remain in an elevated financial risk mode through
mid - 2011, as not even a stronger than expected US and global
economic recovery may be good enough to save any number of
marginal household, business and sovereign credits. For some,
the negative hit to cash inflows relative to debt service already
sustained may be too much to overcome (like Dubai).

I did not expect I would be doing a longer term overview again.
After all, I am no spring chicken. But, we are looking at extreme
low levels of economic activity, and history says that when such
is addressed, the economy eventually regains substantial verve.

The web is overloaded with points of view that would challenge
my simplistic outlook and I have to say part of the reason I
wanted to establish a stronger position was that it would better
enable me to grasp and profit from deviations to plan as I go along.

There, I said it and I am glad.

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